M1 - DBS Research 2018-04-10: Negatives Are In The Price

M1 - DBS Vickers 2018-04-10: Negatives Are In The Price M1 LIMITED B2F.SI

M1 - Negatives Are In The Price

  • Circles.Life partnership and data revenue inflection point imply room for FY18F/19F consensus earnings to be lifted up.
  • New IoT solutions to account for ~10% of service revenue in FY20F on top of Fixed services' ~20% contribution.
  • Upgrade to HOLD with revised Target Price of S$1.76.

Upgrade to HOLD due to Circles.Life partnership, data revenue inflection point and Internet of Things (IoT). 

  • After a long hiatus, M1 is able to grow its service revenue (+6% y-o-y in 2H17) due to its
    1. partnership with Circles.Life and
    2. data revenue reaching an inflection point of ~56% whereby data revenue growth is outpacing voice and SMS revenue decline. 
  • Going forward, we project Fixed services & IoT to contribute ~30% of service revenue in FY20F (versus 16% now). Assuming TPG enters in 2H18F and gains 7% mobile revenue share by 2022, we project M1’s earnings to recover in FY21F.

Where We Differ:

We expect consensus to raise FY18F/19F earnings and hence dividends by 5%/10%. 

  • We don’t think 700 MHz spectrum will be available before 2H19 as Malaysia & Indonesia use this spectrum for Analogue TV, causing interference. As such, we don’t project any amortisation of S$180m spectrum price over the next 12-months. 
  • Consensus also expects M1 to lose more revenue share than its peers to TPG, which we think is unlikely due to the former's partnership with Circles.Life.

Potential catalyst: 1Q18 and 2Q18 results. 

  • Revenue momentum seen in 2H17 is likely to be carried forward in 1Q18, convincing investors that M1’s business is tracking well versus its peers.


Revised Target Price of S$1.76. 

  • Our FY18F target price based on DCF valuation (WACC 7.1%, terminal growth 0%) has been raised to S$1.76 on the back of slower decline in mobile revenue despite TPG’s entry, coupled with new revenue from IoT.

Key Risks to Our View

  • Bear and Bull case scenario. TPG gaining 10% mobile revenue share by 2022 would lead to our bear case Target Price of S$1.49 while TPG gaining only 4% revenue share would lead to our bull case Target Price of S$1.95.

WHAT’S NEW - IoT to drive earnings recovery 

Mobile service revenue has started to grow finally. 

  • In the latest 4Q17 results, mobile service revenues grew 4% y-o-y to S$165m. This was achieved despite much lower handset sales and subsidies and we think revenue share from Circles.Life could be a big factor here. Fixed revenues rose to S$36m (+33% y-o-y) due to higher fiber customer base and contributions from corporate segment projects and comprised 17% of the total service revenue.
  • We believe that M1, being the network provider of Circles.Life, is benefitting from ~1% revenue share gained by Circles.Life by virtue of its low-touch business model and customisable plans. While the market is concerned about TPG’s entry in late 2018, Circles.Life is quietly chipping away market share under the radar.

M1 has reached an inflection point of data contributing to ~56% of service revenue. 

  • M1 is fast combating the threat of declining legacy revenues, generating ~56% of its FY17 service revenue from data whereby data revenue growth is outpacing voice and SMS revenue decline. Based on our estimates data revenue is likely to reach ~70% over the next three years.
  • Our findings from the Japanese market indicate that when data revenues contribute over 60% to mobile service revenues, declines in legacy revenues lose pace and mobile service revenue growth stabilise. We believe a similar scenario may transpire in M1 with mobile service revenues stabilising once the contribution of data revenues exceeds 60% of service revenues.

Telco to smart communications provider. 

  • In 4Q17 M1 launched its nationwide Narrowband Internet of Things (NBIoT) network across Singapore with the aim of capturing opportunities in IoT and the Smart Nation initiative. We believe that the telco is poise to reap benefits from its diversification efforts by entering into fast growing segments such as NB-IoT leading to earnings trajectory tuning positive from FY20 onwards.
  • We are of the opinion that IoT based business solutions will contribute to ~10% of M1’s total revenue by FY20F reducing the drag on revenues from the entry of TPG. 
  • Going forward, M1 plans to scale up info-com technology (ICT) capabilities and solutions over connectivity. The move to newer pastures is to capture opportunities in IoT, cloud computing, data analytics and Smart Nation initiative, and to expand its digital services portfolio. Management sees ICT and digital services as a potential growth catalyst and envisages that this segment will contribute ~20% of service revenue in the future.
  • M1 has already signed several MoUs to develop its IoT business portfolio (smart power metering, smart environmental monitoring, smart fleet & vehicles management, smart waste management, smart logistics and smart facilities management). Ex: OTTO Waste Systems and SmartCity Solutions, Keppel Electric. The telco is also on the lookout for acquisition opportunities in complementary and adjacent businesses to achieve the desired contribution from ICT and digital business segment.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2018-04-10
DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 1.76 Up 1.490